Did Prices Drive Recent Healthcare Spending?

Rich Daly, HFMA senior writer/editor

Provider efforts to bring down high prices and reduce wide variations within markets may await a wide-scale implementation of value-based payment models.

Jan. 30—Healthcare prices were cited as the driver of the recent surge in healthcare spending, but that conclusion may be missing the whole picture, according to some researchers.

The Health Care Cost Institute (HCCI) recently issued a high-profile
report that concluded that price hikes in a recent five-year period—and not utilization—drove healthcare spending. Specifically, HCCI found accelerating total spending per person among the commercially insured population—4.6 percent growth in 2016, compared to 4.1 percent in 2015 and sub-3 percent growth from
2012 to 2014.

The research concluded that the spending growth in those years was due almost entirely to price increases, with especially large increases for administered drugs, emergency department (ED) visits, and surgical hospital admissions. And those increases came as utilization of most
healthcare services remained unchanged or declined, according to the findings, which were based on claims data from Aetna, Humana, Kaiser Permanente, and UnitedHealthcare.

“Working Americans are using the same or less care and paying significantly more,” Niall Brennan, president of HCCI, said in a webcast. “That has huge implications for the stability of the healthcare system.”

What’s Missing?

But the HCCI data look only at a narrow slice of the U.S. healthcare system and do not reflect overall price and spending trends, other researchers note.

“In general, we have seen relatively low price growth in health care in the time period that they are looking at,” Ani Turner, co-director of sustainable health spending strategies for the Altarum Institute, said in reference to the HCCI research. “In fact, at times
healthcare prices overall were growing lower than the overall inflation rate, which is unusual.”

For example, Altarum found total price growth of less than 1 percent in 2015, which is the smallest increase since the organization started measuring prices in 1965. Using data from the Centers for Medicare & Medicaid Services (CMS), Altarum found that during the five-year period studied
by HCCI, healthcare prices increased by 4.9 percent, including a 5.7 percent total increase in hospital prices. In contrast, HCCI found that inpatient prices increased by 24.3 percent and outpatient prices by 17.7 percent during that period.

“You can see how that is in stark contrast to saying, ‘These prices are rising quickly,’” said Paul Hughes-Cromwick, co-director of sustainable health spending strategies for Altarum.

The different results stem from Altarum’s examination of spending by all private and public payers, as opposed to just the group of commercial health insurers that was examined by HCCI. The difference in methodology also explained why HCCI would have seen utilization stagnate or decline, even as the
Affordable Care Act (ACA) vastly expanded coverage and utilization—because most of that expansion was occurring in Medicaid.

Also difficult to capture is the intensity of services provided. An increase in intensity can make care for the same condition increasingly expensive as additional services are introduced to improve that package of care, Turner said.

The effect of service intensity also was highlighted by Melinda Buntin, PhD, chair of the Health Policy department at Vanderbilt School of Medicine.

“What appears to be happening is that the ‘intensity’ of services used to treat illnesses—say, during a hospitalization—has gone up as well as the prices of the individual components, leading to a greater increase in overall spending,” Buntin said in comments to HFMA News.

Metaphorically, the difference could stem from the cost of an overall meal, rather than just the cost of food.

It was likely difficult for HCCI to capture such changes in intensity. One
recent study found changes in both the price and intensity of care led to a 50 percent spending increase from 1996 to 2013 and were by far the biggest contributors to spending growth.

The extent of the price growth that HCCI found among pharmaceuticals may be mitigated by the fact that the findings did not account for either the introduction of pricey new drugs or the provision of rebates by drug makers. Turner noted that such rebates can be significant—for example, cutting
up to 50 percent of the cost of expensive Hepatitis C curative medicines.

Outside conclusions that Brennan highlighted as supporting HCCI’s findings on the dominant effect of price included the
projection of the Office of the Actuary of CMS that prices will drive most of the coming increases in healthcare spending.

“That was off these historically low growth rates,” Hughes-Cromwick said in reference to the actuary’s expectation of future price increases. “So saying they are going to accelerate is very different than saying that there are these large annual price increases.”

The divergence between HCCI and CMS data also was seen in drug prices, which HCCI found increased by 25 percent, compared with CMS’s finding of a 9.8 percent increase.

Other factors that may have influenced provider prices in certain areas, such as ED care, may reflect cost transfers needed to cover underpayment by public payers. Some industry experts have cited commercial insurance ED price increases as an example of this trend.

The ACA’s 2014 coverage increase was most evident in the volume of ED visits by beneficiaries in Medicaid and the Children’s Health Insurance Program. Those visits increased by 25 percent, or more than 10 million, that year, according to the Centers for Disease Control and Prevention
(CDC). That increase vastly outstripped a decline of 2.9 million in visits by the uninsured. Meanwhile , hospitals received payment of only 88 cents for every dollar spent on caring for Medicaid patients in 2016, according to American Hospital Association
data.

Addressing Prices

Despite reaching a different conclusion about the impact of recent price growth, the Altarum researchers agreed that healthcare price levels are far too high.

“In every which way you want to look at it, healthcare prices in America are ridiculously high,” Hughes-Cromwick said.

Providers may have to rationalize their prices if price transparency initiatives become more widespread—“if we ever get the consumer engagement we have been talking about for basically 20 years,” he said.

New payment models and innovative healthcare market entrants also have potential to influence provider prices. But all the potential levers to rationalize provider prices and price variation will require greater external pressure, such as was seen during the health maintenance organization
wave in the 1990s.

“So not just demonstrations or small pieces, but getting to be a critical mass of penetration of these kinds of payment models,” Turner said.

Provider efforts to bring down high prices and reduce wide variations within markets may await a wide-scale implementation of value-based payment models.

Jan. 30—Healthcare prices were cited as the driver of the recent surge in healthcare spending, but that conclusion may be missing the whole picture, according to some researchers.

The Health Care Cost Institute (HCCI) recently issued a high-profile
report that concluded that price hikes in a recent five-year period—and not utilization—drove healthcare spending. Specifically, HCCI found accelerating total spending per person among the commercially insured population—4.6 percent growth in 2016, compared to 4.1 percent in 2015 and sub-3 percent growth from
2012 to 2014.

The research concluded that the spending growth in those years was due almost entirely to price increases, with especially large increases for administered drugs, emergency department (ED) visits, and surgical hospital admissions. And those increases came as utilization of most
healthcare services remained unchanged or declined, according to the findings, which were based on claims data from Aetna, Humana, Kaiser Permanente, and UnitedHealthcare.

“Working Americans are using the same or less care and paying significantly more,” Niall Brennan, president of HCCI, said in a webcast. “That has huge implications for the stability of the healthcare system.”

What’s Missing?

But the HCCI data look only at a narrow slice of the U.S. healthcare system and do not reflect overall price and spending trends, other researchers note.

“In general, we have seen relatively low price growth in health care in the time period that they are looking at,” Ani Turner, co-director of sustainable health spending strategies for the Altarum Institute, said in reference to the HCCI research. “In fact, at times
healthcare prices overall were growing lower than the overall inflation rate, which is unusual.”

For example, Altarum found total price growth of less than 1 percent in 2015, which is the smallest increase since the organization started measuring prices in 1965. Using data from the Centers for Medicare & Medicaid Services (CMS), Altarum found that during the five-year period studied
by HCCI, healthcare prices increased by 4.9 percent, including a 5.7 percent total increase in hospital prices. In contrast, HCCI found that inpatient prices increased by 24.3 percent and outpatient prices by 17.7 percent during that period.

“You can see how that is in stark contrast to saying, ‘These prices are rising quickly,’” said Paul Hughes-Cromwick, co-director of sustainable health spending strategies for Altarum.

The different results stem from Altarum’s examination of spending by all private and public payers, as opposed to just the group of commercial health insurers that was examined by HCCI. The difference in methodology also explained why HCCI would have seen utilization stagnate or decline, even as the
Affordable Care Act (ACA) vastly expanded coverage and utilization—because most of that expansion was occurring in Medicaid.

Also difficult to capture is the intensity of services provided. An increase in intensity can make care for the same condition increasingly expensive as additional services are introduced to improve that package of care, Turner said.

The effect of service intensity also was highlighted by Melinda Buntin, PhD, chair of the Health Policy department at Vanderbilt School of Medicine.

“What appears to be happening is that the ‘intensity’ of services used to treat illnesses—say, during a hospitalization—has gone up as well as the prices of the individual components, leading to a greater increase in overall spending,” Buntin said in comments to HFMA News.

Metaphorically, the difference could stem from the cost of an overall meal, rather than just the cost of food.

It was likely difficult for HCCI to capture such changes in intensity. One
recent study found changes in both the price and intensity of care led to a 50 percent spending increase from 1996 to 2013 and were by far the biggest contributors to spending growth.

The extent of the price growth that HCCI found among pharmaceuticals may be mitigated by the fact that the findings did not account for either the introduction of pricey new drugs or the provision of rebates by drug makers. Turner noted that such rebates can be significant—for example, cutting
up to 50 percent of the cost of expensive Hepatitis C curative medicines.

Outside conclusions that Brennan highlighted as supporting HCCI’s findings on the dominant effect of price included the
projection of the Office of the Actuary of CMS that prices will drive most of the coming increases in healthcare spending.

“That was off these historically low growth rates,” Hughes-Cromwick said in reference to the actuary’s expectation of future price increases. “So saying they are going to accelerate is very different than saying that there are these large annual price increases.”

The divergence between HCCI and CMS data also was seen in drug prices, which HCCI found increased by 25 percent, compared with CMS’s finding of a 9.8 percent increase.

Other factors that may have influenced provider prices in certain areas, such as ED care, may reflect cost transfers needed to cover underpayment by public payers. Some industry experts have cited commercial insurance ED price increases as an example of this trend.

The ACA’s 2014 coverage increase was most evident in the volume of ED visits by beneficiaries in Medicaid and the Children’s Health Insurance Program. Those visits increased by 25 percent, or more than 10 million, that year, according to the Centers for Disease Control and Prevention
(CDC). That increase vastly outstripped a decline of 2.9 million in visits by the uninsured. Meanwhile , hospitals received payment of only 88 cents for every dollar spent on caring for Medicaid patients in 2016, according to American Hospital Association
data.

Addressing Prices

Despite reaching a different conclusion about the impact of recent price growth, the Altarum researchers agreed that healthcare price levels are far too high.

“In every which way you want to look at it, healthcare prices in America are ridiculously high,” Hughes-Cromwick said.

Providers may have to rationalize their prices if price transparency initiatives become more widespread—“if we ever get the consumer engagement we have been talking about for basically 20 years,” he said.

New payment models and innovative healthcare market entrants also have potential to influence provider prices. But all the potential levers to rationalize provider prices and price variation will require greater external pressure, such as was seen during the health maintenance organization
wave in the 1990s.

“So not just demonstrations or small pieces, but getting to be a critical mass of penetration of these kinds of payment models,” Turner said.

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